Keywords

19.1 Introduction

Within the global context, Chile as a whole may be considered privileged in terms of water resources. The average total runoff is on average equivalent to 53,000 m3/person/year (World Bank 2011), a value considerably higher than the world average (6,600 m3/person/year). However, there exist significant regional differences: from Santiago to the north, arid conditions prevail with average water availability below 800 m3/person/year, while south of Santiago the water availability is significantly higher reaching over 10,000 m3/person/year.

Water withdrawals in Chile average approximately 4,000 m3/s/year (World Bank 2011). Of this almost 85 % is used in non-consumptive hydroelectric generation. Consumptive water use in Chile is dominated by irrigation with 73 % of consumptive water use. Industrial use of water is 12 % of consumptive withdrawals, mining and potable water supply account for 9 % and 6 % of total water consumptive water use, respectively. It is interesting to note that all consumptive water uses have increased since 1990; total consumptive water use has increased 13 % between 1990 and 2006. Industry is the sector with the highest consumptive water use increase (79 %), followed by potable water and mining (48 % and 46 %, respectively).

Growing water scarcity puts more pressure on policy makers to improve water allocation, make irrigation systems financially sound, and provide incentives for adoption of water-saving technologies. The different water policies in existence prior to 1980 were limited in their ability to reach an economically efficient water allocation. These limitations were primarily related to the definition of water rights, the information available to users, and transaction costs. The objective of the governmental action in this field was to create solid water use rights in order to facilitate the proper operation of the market as an allocation mechanism. The Water Code of 1981 (WC 1981) established transferable water rights and facilitated water rights markets as a water allocation mechanism. Hence, Chile’s 1981 water law is illustrative of a transition from water management based on command and control to one based on a mix of command and control and economic policy instruments (EPIs), where economic incentives play a significant role in water allocations.

Water Rights (WR) markets in Chile, have helped to (i) facilitate the reallocation of water use from lower to higher value users (e.g., from traditional agriculture to export-oriented agriculture and other sectors such as water supply and mining), (ii) mitigate the impact of droughts by allowing for temporal transfers from lower value annual crops to higher valued perennial fruit and other tree crops, and (iii) provide lower cost access to water resources than alternative sources such as desalination (Donoso et al. 2010, 2014; Grafton et al. 2011; Jouravlev 2010; Hadjigeorgalis 2009; Hadjigeorgalis and Riquelme 2002; Rosegrant and Gazmuri 1994).

The problems that water use rights market have not been able to resolve are water use inefficiency in all sectors, not only in the agricultural sector, environmental problems, and the maintenance of ecological water flows. Additionally, WR trades from agricultural users to water and sanitation and mining companies, leads to greater water use. This occurs since agriculture does not demand water all year round as these industries. Since WR specify a total water flow and not effective water consumption, water use increases when WR are transferred from agriculture to more water-intensive economic sectors. The elements that have hindered WR market effectiveness are the lack (i) of WR and WR market information; (ii) of securitization of customary WR; and (iii) of a rapid, efficient controversy resolution system.

19.2 Setting the Scene: Challenges, Opportunities and WR Markets in Chile

The average total runoff is on average equivalent to 53,000 m3/person/year (World Bank 2011), a value considerably higher than the world average (6,600 m3/person/year). However, there exist significant regional differences: in the Northern Dry Pacific area, arid conditions prevail with average water availability below 800 m3/person/year, in Central Chile, water availability is on average 2,500 m3/person/year, while in the Southern Humid Pacific area, water availability is significantly higher reaching over 10,000 m3/person/year (see Fig. 19.1).

Fig. 19.1
figure 1

Surface water runoff and rainfall (mm/year) (Based on DGA 2014; Peña et al. 2011)

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Average annual recharge of groundwater resources in Chile also varies geographically. In the Dry Pacific area, aquifer’s recharge is approximately 55 m3/s, while it is three times that level in the Southern Humid Pacific (160 m3/s). However, estimated groundwater extractions in the Dry Pacific reaches an average of 88 m3/s (Salazar 2003); therefore, groundwater use in this area is unsustainable.

Water withdrawals in Chile average approximately 4,000 m3/s/year (World Bank 2011). Of this total, 85 % is used for non-consumptive hydroelectric generation. Consumptive water use in Chile is dominated by agriculture with 73 % of consumptive water use. Industrial use of water is 12 % of consumptive withdrawals, mining and potable water supply account for 9 % and 6 % of total water consumptive water use, respectively. Thus, agricultural production is the greatest consumptive water user in Chile, which is the case in most undeveloped nations (Molden et al. 2007).

In the last 30 years Chile’s real GDP has grown at an annual growth of 6.2 % (Banco Central de Chile 2013). During the same period, total consumptive water use has increased 13 %; industry is the sector with the highest consumptive water use increase (79 %), followed by water and sanitation services and mining (48 % and 46 %, respectively). These increased water demands due to increased economic growth,Footnote 1 together with population growth, urbanization, water contamination and pollution, are putting considerable pressure on available water resources. Decoupling of economic growth from water demands in Chile has thus, not been an automatic by-product of growth in national incomes and requires dedicated policies to improve water allocation between competing uses so as to not limit future economic growth.

The different water policies in existence prior to 1980 were limited in their ability to reach an economically efficient water allocation. These limitations were primarily related to the definition of water rights, the information available to users, and transaction costs. Additionally, these policies were not consistent with the many neo-liberal reforms introduced by the military government. During this period, the establishment and defence of property rights and the restriction of state interference in markets drove reforms in the Chilean water sector. The first step towards reforming the National Water Code occurs in 1979 with the Executive Decree 2.603, which recognized customary and historical water rights. This decree strengthened the security of private ownership of water rights, separating water rights from land ownership. Article 19 number 24 of the Chilean Constitution of 1980, which distinguishes between constituted and recognized water rights, reinforces this.

The 1981 National Water Code established transferable water rights and facilitated water markets as a water allocation mechanism. Hence, Chile’s 1981 water law is illustrative of a transition from water management based on command and control to one based on economic policy instruments (EPIs), where economic incentives play a significant role in water allocations.

19.3 The Chilean Water Rights Markets in Action (1800–2800 Words)

The Water Code of 1981 (WC 1981) maintained water as “national good for public use,” but granted permanent, transferable water rights (WR) to individuals so as to reach an economically efficient water allocationFootnote 2 through market transactions of WR; these WR were granted free of charge and without requiring a specification on intended use. The WC 1981 allowed for freedom in the use of water to which an agent has WR; thus, WR are not sector specific. Similarly, the WC 1981 abolishes the water use hierarchy of use lists, present in the previous Water Codes of 1951 and 1967. Additionally, WR do not expire and do not consider a “use it or lose it” clause.Footnote 3

The WC 1981 established that WR are transferable in order to facilitate WR markets as an allocation mechanism. The framers of the WC 1981 sought to achieve the efficiencies of market reallocation of water, the objective of the governmental action in this field was to create solid water use rights in order to facilitate the proper operation of the market as an allocation mechanism (Buchi 1993). Thus the WC 1981 was designed to protect traditional and customary WR and to foster economically beneficial reallocation through market transfers (Bauer 2004; Buchi 1993; Hearne and Donoso 2005).

The WC 1981 specifies consumptive WR for both surface and groundwater, and non-consumptive WR for surface waters. Non-consumptive WR allow the owner to divert water from a river with the obligation to return the same water unaltered to its original water source.Footnote 4 Consumptive use rights do not require that water be returned once it has been used. Consumptive and non-consumptive WR are, by law specified as a volume per unit of time. However, given that river flows are highly variable in most basins, these WR are recognized in times of scarcity as shares of water flows. This characteristic of WRFootnote 5 has proven to be appropriate, given that the use of a system of WR defined as pure shares precludes any excess water use for other uses such as environmental objectives since it would lead to full use of water by the current holders of WR (World Bank 2011). However, total granted water flows are greater than average water supply in most basins in the north of Chile and, thus, there was no water provision for environmental objectives.

Additionally, consumptive and non-consumptive WR can be exercised in a permanent or contingent manner and in a continuous, discontinuous or alternating mode. Permanent WR are specified as a volume per unit of time, unless there is water scarcity in which these WR are recognized as shares of water flows. Total permanent WR are determined by the water flow that is satisfied at least 85 % of the time. Contingent rights are specified as a volume per unit of time and only authorize users to extract water once permanent rights have extracted their rights. These rights are determined by average flows of the basin that exceed those assigned to permanent rights. Continuous rights are those use rights that allow users to extract water continually over time. On the other hand, discontinuous rights are those that only permit water to be used at given time periods. Finally, alternating rights are those in which the use of water is distributed among two or more persons who use the water successively.

New WR are granted free of charge, and the petition procedure for a new WR starts with an application that had to meet the following requirements:

  1. (a)

    Identification of the water source from which the water is to be extracted, specifying whether the source is surface water or ground water;

  2. (b)

    Definition of the quantity of water to be extracted, expressed in litres per second;

  3. (c)

    Yield and depth must be specified in the case of groundwater;

  4. (d)

    Specification of the water extraction points and the method of extraction; and

  5. (e)

    Definition of whether the right is consumptive or non-consumptive, permanent or contingent, continuous, discontinuous or alternating.

The administrative procedure requires that this application be published in the Diario Oficial, in a daily Santiago newspaper, and in a regional newspaper, where applicable. Previous to the WC 1981 reform of 2005, the DGA could not refuse to grant new water rights without infringing a constitutional guarantee, provided there was technical evidence of the availability of water resources and that the new use would not harm existent rights holders.Footnote 6 If there is competition for solicited water rights, they are to be allocated through an auction with an award to the highest bidder. This allocation rule between competing WR petitioners was designed so as to allow water to be allocated to its highest use value. The allocated WR is registered in the DGA’s Public Water Registry (PWR).

Peña et al. (2004) and Bitrán and Sáez (1994) point out that the absence of an obligation to use WR led to a proliferation of WR requests for speculation and hoardingFootnote 7 purposes, that led to non-real water shortages and created obstacles to the development of new investment projects due to the impossibility of acquiring new WR. This was particularly evident in the case of non-consumptive WR where entry barriers were created for new hydroelectric plants, discouraging competition in hydroelectric power generation. In fact, Riestra (2008) points out that of 15,000 m3/s granted in non-consumptive WR, only 2,800 m3/s were being effectively used. There is little concern about unused consumptive rights for water, given that, under a system of proportional use, all water is eventually distributed to users (Hearne and Donoso 2005). Dourojeanni and Jouravlev (1999) estimate the percentage of consumptive use rights that are unused to be less than one percent of the total allocated consumptive WR.

The State, concerned about monopolistic behaviour and supported by the antimonopoly commission, refused to grant new non-consumptive WR. In fact, the Constitutional Court established that the State could impose additional conditions on petitions for new WR by reformulating the WC 1981. This led to an amendment of the dispositions of the WC 1981 in 2005. The Law No. 20,017 of 2005 amended the procedure to grant new WR of the WC 1981 and introduced a non-use tariff (patente de no-uso). The WR petitioner must now justify the water flow that is petitioned and clearly indicate the use that will be given to the water. Additionally, WR are only granted in accordance with the requirements of the use the WR is solicited for.

Due to the difficulties of monitoring the effective use of all WR, the non-use tariff is applied to all consumptive WR that do not count with water intake infrastructure and to all non-consumptive WR that do not have water intake and return infrastructure (Law No. 20,017 of 2005, art. 129 bis 4–6). Non-use tariff (τ) for consumptive and non-consumptive WR is calculated as \( \tau =\gamma Qf \) and \( t=g\kern0.1em QHf, \) respectively, where γ is a constant that varies geographically,Footnote 8 Q represents the average water flow that is not used, f is a temporal factor,Footnote 9 and H is the difference between the water intake level and the level where the water is returned.Footnote 10

19.3.1 Assessment of Chile’s WR Markets

19.3.1.1 Environmental Outcomes

Water quality was not an objective of the WC 1981, its focus was and still is on water quantity and allocation. For example, the non-use tariff is biased towards productive uses since non-use is defined as the lack of water extraction infrastructure. Thus, all in-stream uses are subject to the non-use tariff.

Law No. 19,300 of 1994 introduced the main instruments available for water quality management; these instruments are: (a) environmental water quality standards, (b) decontamination plans and strategies, (c) emission standards, (d) environmental impact assessments for new investments, and (e) minimum ecological flows. Therefore, changes in water quality in the past 30 years cannot be attributed to WC 1981.

Before the WC 1981 reform of 2005, most river basins located in the Dry Pacific and Central Chile Regions were fully allocated and, thus, it has not been possible to implement minimum ecological flows due to the lack of water. River basins that have protected minimum ecological flows are mainly located in the Southern Humid Pacific Region where water is more abundant and presents lower use values.

The main regulatory measure established in the WC 1981 to control for potential negative effects on third parties and/or the environment due to the transfer of WR between water users is when the transfer implies a change of water intake location, the transfer must be authorized by the DGA. The analysis of potential third party or environmental effects associated with WR transfers between water users is conducted by the DGA. Transfer requests, as well as new WR petitions, are broadcast three times and published in a newspaper at the national and provincial levels. Additionally, the SEIA introduced in 1994 by the Law 19,300 requires water users to mitigate or compensate environmental damages that may result from the transfer of WR. It is important to note that transfers of WR that do not require a change in water intake location are not regulated.

A major challenge of WR markets in Chile is how to ensure optimal water use without compromising the sustainability of rivers and aquifers. The sustainability of northern rivers and aquifers is compromised due to the over-provision of WR related to the practice of allocating WR based on foreseeable use. The foreseeable use considers the probable effective water extraction of different sectors. For example, an agricultural WR does not extract water in winter months, whereas a mining WR extracts water all year round. In this case, the authority would consider a lower pressure on water resources of an agricultural WR with respect to the pressure of a mining WR. This practice commits the mistake of not considering the transferable nature of WR. Thus, when water scarcity increases and inter-sectoral WR transactions increase, water resources will be overexploited and unsustainable.

The WC 1981 did not pay much attention to the sustainable management of groundwater because at that time, groundwater extraction was marginal during the early 80s. Recognizing the need to improve groundwater management regulation due to increased groundwater pumping, the 2005 amendment of the WC 1981 introduced procedures to reach a sustainable management of underground water resources. However, World Bank (2011) concludes that these groundwater regulations have not been fully implemented over time and thus, there exist various problems associated with groundwater management.

19.3.1.2 Economic Outcomes

Although market reallocation of water has not been common throughout most of Chile, the existence of water markets has been documented. Studies have shown active trading for WR in the Limarí Valley, where water is scarce with a high economic value, especially for the agricultural sector (Hearne and Easter 1997; Donoso, et al. 2002; Hadjigeorgalis 2004). Inter-sectoral trading has transferred water to growing urban areas in the Elqui Valley (Hearne and Easter 1997), the upper Mapocho watershed and the first section of the Maipo Basin, where water companies and real estate developers are continuously buying water and account for 76 % of the rights traded during the 1993–2003 period (Donoso et al. 2002, 2014). Other studies have shown limited trading in the Bío Bío, Aconcagua, and Cachapoal Valleys (Bauer 1998; Hadjigeorgalis and Riquelme 2002).

A key conclusion of these studies is that water markets are driven by relative scarcity of water resources, demand from relatively high-valued water uses and facilitated by low transactions costs in those valleys where WUAs and infrastructure present assist the transfer of water. In the absence of these conditions trading has been rare and water markets have not become institutionalized in most valleys (Hearne and Donoso 2005).

Table 19.1 presents consumptive WR transaction data based on the PWR of the DGA, for the period 2005–2008.Footnote 11 The results for this 4-year period show 21,849 WR transactions, of which 94 % were independent of other property transactions, such as land. As expected, WR markets are more active in areas where the resource is scarce; WR transactions decrease from the Dry Pacific Region towards the Southern Humid Pacific. In fact, the Dry Pacific region accounts for 56 % of total transactions in this period.

Table 19.1 Consumptive WR transactions and prices for the period 2005–2008 (World Bank 2011)
Full size table

The value of WR transactions independent of other property transactions is US$ 4.8 billion, which on average is US$ 1.2 billion per year. As water scarcity increases so does the value of each WR. The Dry Pacific Region, which has an average water availability below 800 m3/person/year, presents an average WR price of US$ 512,243, which decreases to US$ 50,863 in the Southern Humid Pacific, whose water availability is significantly higher.

WR prices present a large dispersion, with a coefficient of variation of 470 %. This large price dispersion is due, in great part, to the lack of a WR prices revelation mechanism, and reflects, in fact, that welfare gains from trade have not yet been exhausted. Each WR transaction is, thus, the result of a bilateral negotiation between an interested buyer and seller of WR where each agent’s information, market experience and negotiating capacity is important in determining the final result (Donoso et al. 2014).

Jouravlev (2010) notes that as a result of the WC 1981 reform of 2005 (together with other measures), consumptive WR that still are not used are, in general, no longer a major obstacle to the development of the water basin. Additionally, it is likely that non-use of WR will continue to reduce in the future due to the projected increase in the non-use tariff. Along the same lines, Valenzuela (2009) notes that the non-use tariff has operated as a small incentive for the return of non-consumptive WR; an equivalent of 65 m3/s has been returned, which represents 1 % of both the total WR affected by the non-use tariff.

The elements that have hindered WR market effectiveness are the:

  1. (a)

    Lack of WR and WR market information;

  2. (b)

    Lack of regularization of customary WR;

  3. (c)

    Existence of transaction costs;

  4. (d)

    Lack of a rapid, efficient controversy resolution system.

19.3.1.3 Distributional Effects and Social Equity

Research in Chile on the impact of WR markets on small farmers, has been limited and no reliable conclusions have been reached to date. Hadjigeorgalis (2008) is a notable exception. She conducted research in the northern Limarí water basin in order to study the impact of water markets on small farmers. Results indicate that WR markets have been equitable with respect to offer prices; resource-constrained farmers receive the same offer prices for their water and water rights as wealthier farmers. Additionally, these markets represent a safety net for small farmers.

Future research on the equity impacts of WR markets is required to clarify the distributional effects of WR markets.

19.3.2 The Setting Up of Chile’s WR Markets

19.3.2.1 Institutions (or Institutional Set-up)

The WC 1981 did not establish new institutions; however, it significantly modified their existing powers established in the WC 1967. Under the WC 1981, the State reduced its intervention in water resources management to a minimum and increased the management powers of water use rights holders that are organized in WUAs.

The Dirección General de Aguas (DGA), part of the Ministerio de Obras Públicas (MOP), is the main public institution and is responsible for monitoring and enforcing the WC 1981. With its 15 regional offices, it collects and maintains hydrological data and PWR. As the leading government agency in water resources management, it develops and enforces national water policy. In this role, it has led efforts to amend the 1981 Water Code and developed a National Water Policy. In general, the DGA has maintained a limited role in accordance with the paradigm of limited state interference on which the WC 1981 is inspired.

However, multiple central authorities (ministries, departments, public agencies) are involved in water policy making and regulation at central government level. In Chile the number of actors involved in water policy making are 43, the highest of Latin American and OECD countries (Akhmouch 2012; OECD 2011; World Bank 2013). The overall performance evaluation of Chile’s water institutionality is low, due to a high level of fragmentation, insufficient budget and qualified personnel, and problems in horizontal and vertical coordination (Akhmouch 2012; OECD 2011; World Bank 2013).

The WC 1981 establishes that WR owners are responsible for local water management. User management has existed in Chile since the colonial era, and currently there are more than 4,000 Water User Associations (WUAs) (Dourojeanni and Jouravlev 1999). Three types of WUAs exist in Chile and are recognized by the WC 1981: comunidades de aguas (water communities), associaciones de canalistas (canal user associations), and juntas de vigilancia (river user committees).Footnote 12

Many of these WUAs have professional management (Hearne and Donoso 2005). The effectiveness of some of these institutions in managing irrigation systems and reducing transactions costs for water market transactions has been noted (R. Hearne and Easter 1997). However, according to the DGA and the Dirección de Obra Públicas (DOH), a large percentage of these institutions have not updated their capacity to meet new challenges. Additionally, (Bauer 1998) points out that vigilance committees have not been effective in resolving inter-sectoral conflicts. To address some of these concerns, the Comisión Nacional de Riego (CNR) and DGA have implemented programs to train WUA managers and directors (Peña et al. 2011).

Thus, in order for Chile’s WR markets to deliver its full potential as an efficient allocation mechanism, Chile requires a significant institutional reform.

19.3.2.2 Transaction Costs and Design

Transaction costs associated with the transaction of WR includes legal costs to study WR and elaborate transaction contracts, broker costs, notary costs and registration of WR in Real Estate Registry (Conservador de Bienes Raíces, CBR), and costs regarding the DGA’s authorization of water extraction points changes. The last of these are the most significant; recent studies estimate that transaction costs associated to DGA’s authorization of extraction point changes represent, on average, between 20 % and 50 % of the WR’s value, depending on the geographic location of the WR.

The costs associated with the use of water acquired are those that are required to modify water distribution infrastructure.Footnote 13 These transaction costs due to infrastructure modification have been estimated to be approximately 10 % of the WR’s value in the Maipo River (Donoso et al. 2002).Footnote 14 On the other hand, transactions carried out in river basins with flexible-pipe distribution systems occur with much greater frequency.

19.4 Conclusions

Compared to the situation in most countries in Latin America and the Caribbean, Chile’s water policies are unusually conducive to efficient resource use and development (Southgate and Figueroa 2006). Secure and transferable property rights are the salient feature of the Chilean regime. In Chile, water use rights markets guide the use of water, including its reallocation when and where appropriate.

This review of Chile’s WR markets and WC 1981 regulations leads to the identification of lessons that must be considered in order establish an effective water allocation mechanism based on a WR market. The main lessons are the following:

  1. (a)

    A cultural context of the society consistent with the economic paradigm of solving inefficiencies of free access goods based on the establishment of property rights (WR);

  2. (b)

    The existence of water scarcity; when water is not scarce, there is no need to reallocate WR;

  3. (c)

    Clearly specified WR, secure ownership, and formally registered WR;

  4. (d)

    Explicit and transparent conditions for WR trade and transfers;

  5. (e)

    Clear legislation respect to unused WR;

  6. (f)

    Environmental and in-stream needs addressed prior to the introduction of trade;

  7. (g)

    Adequate regulations that address externalities and potential damage to third parties due to WR transactions;

  8. (h)

    A complete registry of WR holders;

  9. (i)

    An efficient information system that considers an efficient flow of market information such as data on transactions and a price revealing mechanism;

  10. (j)

    Detailed information and models of both surface and groundwater resource availabilities;

  11. (k)

    Flexible water distribution infrastructure that allows for the transfer of WR at low costs;

  12. (l)

    Strengthening and capacity building of WUAs.

The elements that have hindered WR market effectiveness in Chile are the;

  1. (a)

    Lack of WR and WR market information;

  2. (b)

    Lack of regularization of customary WR;

  3. (c)

    Existence of transaction costs;

  4. (d)

    Lack of a rapid, efficient conflict resolution system.